One of the most controversial topics online is privacy. On the one hand there are the advertisers and content providers (and those who do both) like Google. They say that keeping user statistics is essential to offering more effective advertising, which in turn is key to generating more revenue and being able to provide users with more content.

However, to some users and consumer advocacy groups data retention, particularly by search engine giants like Yahoo and Google, represents a cohesive invasion of privacy that would not have been possible offline. They say that the potential for abuse of information such as medical searches is too great and that search engines should cut down on their data retention and anonymize data. Anonymous data would allow for slightly more effective ads than unresearched advertising, but it would be less effective than user targeted ads. It’s a necessary loss, say some.

One consumer advocacy group is making waves by demanding the internet’s largest information gatherer — Google — give users an easy way of opting out of data collection entirely. Consumer Watchdog President Jamie Court and Policy Advocate John M. Simpson sent a letter to Google, asking that the company allow users a way to block Google from gathering information on users’ search queries, IP addresses and cookies.

In its most recent letter, addressed to Google CEO Eric Schmidt, Consumer Watchdog states, “We call on you to offer Google’s users such a clearly identifiable “opt out” function on its search engine that is essentially a zero personal data retention policy.”

Consumer Watchdog suggests that Google adopt an easy opt out similar to Ask.com‘s AskEraser. It seems unlikely that Google would want to model itself after such a business, however.

Google arranged a meeting in October to try to sooth Consumer Watchdog, but since the pair’s interactions have been rife with frustration. Google implies (.PDF) that the group does not understand how its Chrome browser’s privacy functions and its Suggest feature work. Consumer Watchdog has written another letter to Google (.PDF) accusing it of misdirection and feigned innocence, saying that Google’s letter “rebuts issues we have not raised and misstates our position.”

The group has called for an after-Christmas meeting with Google. However, given their past interaction, it seems unlikely that either party will get what they want this Christmas — in Google’s case Consumer Watch shutting up, and in Consumer Watch’s case an opt out concession from Google.

Google currently has cut its data retention time to 9 months. Yahoo recently one-upped Google by cutting its own data retention time to 3 months.

Yahoo, Google, and fellow rival Microsoft will likely face tough questions when the European Commission has a working party meeting in February on the topic of data retention. The EC has called for, but not legislated a 6 month data retention period. The governing body of Europe may look to force the search leaders’ hands, which may in turn have a ripple effect on business in America and elsewhere.